501(c)(3) 4 or 5, what’s the difference?

Christian Shaeffer Exempt Non-Profit Organizations Leave a Comment

Often times I’m hired to help an organization or group of people set-up a non profit exempt organization.  Invariably, one of the first questions that comes up is, “under which section of the Internal Revenue Code (IRC) will the organization be considered exempt, and what are the pro’s and con’s?”

First off, we need to back up.  There are many types of exempt organizations including charitable, religious and educational, civic associations, labor organizations, business leagues, social clubs, and fraternal and veterans organizations.  Each of these organizations potentially will fall under a different exempt status code.  And they are all potentially exempt from having to pay federal income tax.

Many organizations will fall under a religious/educational/charitable exemption as described under 501(c)(3) of the IRC.  (In fact this is the largest category of exempt organizations according to the IRS.)  A key advantage for exemption under this section of the code is that contributions are deductible to the donor.  Contributions to most other types of exempt organizations are not tax deductible by the donor (though they may qualify as a business expense).   That said, there are specific rules for organizing and operating a 501(c)(3), and there are specific limits on the activities that can be pursued (for example, no political lobbying for a certain candidate).

Other common exempt organizations include 501(c)6)’s with a common business interest including Chambers of Commerce and Business Leagues (local society of CPA’s, for example).  501(c)(4) Civic Leagues and social Welfare organizations must operate exclusively for the promotion of social welfare and civic betterment.  501(c)(4)’s are not as restricted in their activities as 501(c)(3)’s (though contributions are not deductible).  501(c)(7)’s are for social and recreational clubs and are primarily supported by membership fees and dues, etc.

There are many more details and items to consider.  A thorough discussion with a CPA or Attorney experienced in this area is recommended before deciding on the exempt status option best for your organization.

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